Suppose that you have a one million dollar investment exposure. Choose a futures contract being traded in the CME. What are the specifications of the contract (example: https://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html)? How many contracts will you be able to buy? What are the transaction costs associated with this trade? Explain your answers.

Corn Futures - Dec 2020 = $3.26

Contract Specification:

CONTRACT UNIT : 5,000 bushels

PRICE QUOTATION: U.S. cents per bushel

MINIMUM PRICE FLUCTUATION = 1/4 of one cent (0.0025) per bushel

SETTLEMENT METHOD: Deliverable

TERMINATION OF TRADING : Trading terminates on the business day prior to the 15th day of the contract month.

To hedge the exposure of 1 million dollar

Hedge by single contract = 5000*3.26 = $16300

No. of Contracts required = 1000000/16300= 61.35 contracts ~ 62 contracts

The transaction cost associated this trade are as follows:

• Relevant brokerage charges
• Requirement of Margin = 850 USD/contract = 850*62= $52700 [Interest foregone is the cost associated with it]